Can I Add Money to a Traditional IRA After a 401(k) Rollover?
IRAs, or individual retirement accounts, are tax-advantaged ways to save for retirement. A 401k plan, on the other hand, is an employer-sponsored retirement plan. When you roll money from your 401k plan to an IRA, you are removing your money from the employer's plan but you do not lose the ability to contribute money to your retirement savings.
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Process
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When moving money from a 401k plan to a traditional IRA, you must use a transfer request form. This transfer request form directs your 401k plan administrator to move the funds from your 401k plan to an IRA that you set up on your own. To set up an IRA, you must contact a bank or brokerage firm that you want to do business with. Then, you must fill out an application to open up an IRA. Once this is done, you turn in your transfer request form to the new brokerage where your IRA will be held. The IRA custodian will then send the request to the 401k plan administrator. The administrator will send the funds to the IRA account on your behalf.
Significance
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The significance of this transfer is that you may continue adding funds to your retirement. Instead of making pre-tax contributions, however, you make tax-deductible contributions. Contributions are made from your bank account instead of from your paycheck. Then, on your tax return, you deduct the contributions from your income.
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Benefit
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The benefit of adding money to your IRA account after a 401k rollover is that you can continue to save money for your retirement. If you do keep contributing, you increase your potential retirement savings since you are increasing the investment capital in the account.
Disadvantage
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The disadvantage to contributing money to an IRA after a 401k rollover is that the contribution amount must be less than your 401k plan's contribution amount. As of 2010, the 401k maximum contribution amounts are $16,500, while IRA maximum contribution amounts are $5,000. This means that, overall, less money will be available over time in your IRA than in your 401k. You also lose any potential employer match that you had in your 401k plan.
Considerations
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Before rolling your 401k plan into an IRA, consider keeping your 401k plan where it is. Even if you leave your employer, you are not required to move your 401k plan money. However, by leaving your 401k plan money with your employer, you also limit your investment options to whatever your employer makes available to you, whereas an IRA may have many more investment options.
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